Liquidity in The Private Equity Market
The private equity secondary market (also often called private equity secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast majority of private equity investments, there is no listed public market; however, there is a robust and maturing secondary market available for sellers of private equity assets.
Increasingly, secondaries are considered a distinct asset class with a cash flow profile that is not correlated with other private equity investments. As a result, investors are allocating capital to secondary investments to diversify their private equity programs. Driven by strong demand for private equity exposure, a significant amount of capital has been committed to secondary investments from investors looking to increase and diversify their private equity exposure.
Investors seeking access to private equity have been restricted to investments with structural impediments such as long lock-up periods, lack of transparency, unlimited leverage, concentrated holdings of illiquid securities and high investment minimums.
Secondary transactions can be generally split into two basic categories:
- Sale of Limited Partnership Interests – The most common secondary transaction, this category includes the sale of an investor's interest in a private equity fund or portfolio of interests in various funds through the transfer of the investor's limited partnership interest in the fund(s). Nearly all types of private equity funds (e.g., including buyout, growth equity, venture capital, mezzanine, distressed and real estate) can be sold in the secondary market. The transfer of the limited partnership interest typically will allow the investor to receive some liquidity for the funded investments as well as a release from any remaining unfunded obligations to the fund.
- Sale of Direct Interests – Secondary Directs or Synthetic secondaries, this category refers to the sale of portfolios of direct investments in operating companies, rather than limited partnership interests in investment funds. These portfolios historically have originated from either corporate development programs or large financial institutions.
Read more about this topic: Private Equity
Famous quotes containing the words private, equity and/or market:
“Make-believe is the avenue to much of the young child’s early understanding. He sorts out impressions and tries out ideas that are foundational to his later realistic comprehension. This private world sometimes is a quiet, solitary
world. More often it is a noisy, busy, crowded place where language grows, and social skills develop, and where perseverance and attention-span expand.”
—James L. Hymes, Jr. (20th century)
“If equity and human natural reason were allowed there would be no law, there would be no lawyers.”
—Christina Stead (1902–1983)
“I respect not his labors, his farm where everything has its price, who would carry the landscape, who would carry his God, to market, if he could get anything for him; who goes to market for his god as it is; on whose farm nothing grows free, whose fields bear no crops, whose meadows no flowers, whose trees no fruit, but dollars; who loves not the beauty of his fruits, whose fruits are not ripe for him till they are turned to dollars. Give me the poverty that enjoys true wealth.”
—Henry David Thoreau (1817–1862)